Previous Lesson:  Purpose of Accounting

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Following are main objectives of accounting.

1. To Maintain Accounting Record

Written  record are always better than oral records, since written records can be used by different persons for different decision-making purposes and serve as evidence of transactions. Nowadays, the volume of transactions is so large; a human memory cannot absorb each and every transaction. Accounting is done to keep a systematic record of all transactions.

 

2. To Calculate the Results of Operations

To measure the financial performance of an enterprise, the results of operations are ascertained by preparing an Income Statement (also called trading and profit and loss account), which shows the matching of current costs with current revenues during a particular accounting period. A systematic record of income and expenses facilitates the preparation of the income statement.

3. To Ascertain the Financial Position

To evaluate the financial strength and weakness of an enterprise, the financial position is ascertained by preparing a Statement of Financial Position (also called balance sheet), which shows assets owned by enterprise and the sources of financing those resources. A businessman wants to know what

 

4. To Communicate the Information to the Users

Accounting communicates information to internal user and external users. The internal users include all the organizational participants at the levels of management i.e. top, middle and lower management. Top level management requires information for planning, middle level management requires information controlling the operations. For internal user, the information is usually provided in the form of reports, for instance cash budget report, production report, idle time report etc.

Since the external users e.g. banks and creditors etc. don’t have direct access to the records of an enterprise, they have to rely on financial statement as source information.  External users are basically interested in the solvency and profitability of enterprise.

 

>>> Read and Practice Journal Entries

Types of Accounting Information

Accounting information may be classified number of ways on the basis of purpose of accounting or/and on the basis of measurement criteria and so on. The various types of accounting information are given below:

 

1. Financial Position

Information about financial position is primarily provided in a balance sheet. The financial position of an enterprise is affected by the economic resources to controls its financial structure, its liquidity and solvency and its capacity to adapt to changes in the environment in which it operates.

(a) Information about the economic resources controlled by the enterprise and its capacity in the past to alter these resources is useful in predicting the ability of the enterprise to generate cash and cash equivalents in the future.

(b) Information about financial structure is useful in predicting future borrowing needs and how future profits and cash flows will be distributed among those with an interest in enterprise; it is also useful in predicating how successful the enterprise is likely to be in raising future finance.

(c)  Information about liquidity and solvency is useful in predicting the ability of the enterprise to meet its financial commitments as they fall due. Liquidity refers to the availability of cash in the near future to meet financial commitments over this period. Solvency refers to the availability of cash over the longer term to meet financial commitments as they fall due.

 

2. Financial Performance

Information about financial performance is primarily provided in a statement of Profit and Loss (also called income statement). Information about financial performance of an enterprise, in particular its profitability is required in order to assess potential changes in the economic resources that it is likely to control in the future. Information about variability of performance is important in this respect. Information about performance is useful in predicting the capacity of the enterprise to generate cash flow from existing resource base. It is also useful in forming judgments about the effectiveness with which the enterprise might employ additional resources.

 

3. Cash Flows

Information about cash flows is provided in the financial statements by means of statement of cash flows. Information concerning cash flows of an enterprise is useful in order to evaluate its investing, financing and operating activities during the reporting period. This information is useful in providing the users with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise utilize those cash flows.

 

>> Read and Practice Ledger Account.

Previous Lesson:  Purpose of Accounting

Next Lesson: Types of Business

References

Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.

Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.

Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.

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